Activism Grows Crowded as the Rewards
Remain Rich

As new names enter
the market, competition and crowding increases for all funds. Will
returns hold up?

Is there a bubble building in activist
investing?

It does seem more crowded. In addition to
the usual cast of characters, a number of new participants have joined
the fray in the past few years.

They include Carl Icahn’s onetime right-hand man Keith Meister of New
York–based Corvex Management; former Pershing Square Capital
Management partner Richard T. McGuire III of San Francisco–based
Marcato Capital Management; Jeffrey Smith of New York–based Starboard
Value, one of the busiest activists these days; and Donald Drapkin of
New York–based Casablanca Capital.

And
several of the big activist hedge fund firms have swelled in size in
recent years. Nelson Peltz’s New York–based Trian Partners has been on
a fundraising spree, raising its assets to more than $7 billion from
$3.7 billion at the end of the first quarter of 2012.

Jeffrey Ubben’s San Francisco–based ValueAct Capital has now topped
$12 billion, more than double the $5.2 billion it managed three years
ago.

There are growing signs that it could be getting harder to identify
the types of stocks ripe for change or financial engineering that are
typically targeted by activists. We saw signs of this frustration
building in May at the Ira Sohn conference when Greenlight Capital’s
David Einhorn lamented that his presentation on Oil States
International had been scooped a week earlier when Barry Rosenstein’s
Jana Partners filed a 13D on the energy services company.

Sure enough, in its year-end letter distributed to investors last
week, Jana explained that part of the reason the fund did not perform
as well as it would have liked was because of the “target-rich
environment for activism,” noting that it passed on some activist
situations that were on its radar screen either because management
took actions to drive returns or other activists beat Jana to the
opportunity.

This partly explains why it seems as if it’s increasingly common to
find more than one high-profile activist independently agitating for
change in the same stock.

“We
have seen this happen before,” an executive at a prominent activist
firm says, adding that it’s not so unusual to see more than one
activist in the same stock.

So
far, most activists are not suffering. Last year Trian rose about 40
percent, ValueAct 29.5 percent, Third Point 25 percent and a number of
others about 20 percent, give or take a percent or two.

And
many of them, such as Jana, Third Point and Greenlight, don’t
exclusively engage in activist investing. They are will also go short,
buy stocks for other than activist reasons and even wander away from
the equities markets altogether.

Even so, activists still see good potential activist targets.

In
its third-quarter letter, dated October 30, Trian told clients it
continues to identify “compelling new investments” that have the
potential to grow into core positions. “As of this writing, we have a
substantial number of new ideas that are in various stages of the
diligence/white paper process,” the activist firm added. “It is also
worth noting that we tend to focus on large-cap situations where the
competition from other activists is substantially less intense than
the small- and mid-cap space.”

In
its year-end letter, Jana told clients that it continues to find new
attractive “value + catalyst opportunities,” adding, “Managements,
boards and institutional shareholders are increasingly responsive to
shareholder engagement.”

Indeed, you can see this in the growing number of companies willing to
settle with hedge funds by agreeing to place one or two of their
director candidates on the board. Many others are paying the modern
version of greenmail — capitulating to the bullies by agreeing to use
their cash to pay a fat, onetime dividend and/or buy back shares. Of
course, all shareholders get this payoff, unlike with greenmail, but
the rewards can be rich.

The
most recent example: auction house Sotheby’s, which Wednesday said it
would pay a $300 million special dividend to shareholders and
repurchase $150 million in stock, including $25 million this year.

That wasn’t good enough for Marcato, which fired off a press release
calling on Sotheby’s to return a total of $1 billion of capital to
shareholders within 12 months.

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